How the EU is plotting a course out of COVID debt to greener future

Few singular geopoltical events have shaped EU policymaking as profoundly as the Covid 19 pandemic and the war in Ukraine. The collective response by Brussels’ institutions to these unprecedented challenges came to dominate and define the five-year agenda and achievements of the current Commission and EU parliament. First among those was the huge €800 billion NextGenerationEU fund, which was designed to accelerate the bloc’s post-pandemic recovery and green and digital transition. It saw member states issue joint debt for the first time; a truly historic development that had previously been fiercely resisted by the so-called ‘frugal countries’, even during the height of the finanancial crisis that erupted in 2010. A key mechanism within the NextGenEU fund was The Recovery and Resilience Facility:

COVID also forced Brussels to temporarily abandon its fiscal limits, another radical step. Since then many member states have racked up record debt-to-GDP ratios, an issue the energy shock and high inflation of 2022 only exacerbated. Hugeh expenditure levels were envisaged as an essential component of the bloc’s efforts to exit from the pandemic emergency, but they now cast a shadow over its future spending ambitions to achieve green goals. 

TOWARDS DEBT CONTROL

Recently reformed spending rules aim to bring these gradually back under control. On 30 April 2024, the new economic governance framework entered into force. The Commission says the main objectives of the new framework are “to strengthen Member States’ debt sustainability, and promote sustainable and inclusive growth in all Member States through growth-enhancing reforms and priority investments.” It adds “the  framework helps to make the EU more competitive and better prepared for future challenges by supporting progress towards a green, digital, inclusive and resilient economy.” 

The rules impose a return to the old thresholds of deficits at 3% and debt at 60% of annual GDP respectively, but in significant departure from the previous regime member states have been given more flexibility on how they go about debt reduction.

BALANCING DEBT WITH INVESTMENT

This approach, it’s claimed, will put debt on a downward path while adhering to in-built fiscal safeguards. The new framework “facilitates and encourages Member States to implement the measures needed to secure the green and digital transitions, strengthen economic and social resilience and bolster Europe’s security capacity.”  

The policy comes into force as the EU exits a uniquely troubled five-year parliamentary term and prepares to enter a new one. During this coming cycle post-pandemic funds are due to end in 2026, which will provide a severe test for the new debt control framework and also reveal how well Europe is set to invest in its transition to a green future and  compete with küresel rivals, especially China.